The Market Today

Trade Optimism Levels Off as Growth Worries Remain

by Craig Dismuke, Dudley Carter


Auto Sales and a Couple of Fedspeakers: Today’s economic calendar is the quietest of this holiday-shortened week, with just two Fed officials scheduled to make remarks before an update on auto sales that is expected later in the session. New York Fed President Williams was expected to make remarks on the global economy at 5:35 a.m. CT, but his comments drove no meaningful headlines. At 10 a.m. CT, Cleveland Fed President Mester is scheduled to speak on the economy at an appearance in London. As to Tuesday’s lone data report, economists expect auto sales cooled in June after beating expectations in May.



Yesterday – S&P 500 Eclipsed Previous All-Time High on Hopes Restart of Trade Negotiations Will Keep Longest Expansion on Record Going: The S&P 500 ripped higher at the opening bell, retreated gradually through most of Monday’s session, but recovered in the final couple of hours to end at a new all-time high. The current economic recovery turned expansion became the longest on record Monday. Equity investors cheered a weekend agreement between the U.S. and Chinese presidents to restart trade negotiations that those investors hope will help extend the current unprecedented stretch of economic growth. However, the initial optimism was beset by several data releases reinforcing the weight of those hopes. June manufacturing PMIs pointed to contraction across China and Europe and the ISM’s update showed the weakest pace of U.S. activity since before the presidential election (more below). Those reports played a part in equities trimming their gains and also helped drag Treasury yields down from their overnight highs. Adding to the downward pull on U.S. yields was a sharp reversal lower by European yields during the U.S. session. The ECB’s new chief economist said it’s of utmost importance that central banks “proactively” respond to shocks and noted the ECB “can add further monetary accommodation if it is required.” Separately, a hawkish council member on the ECB’s Governing Council noted it is “indisputable” that inflation is low. The German 10-year yield dropped 2.8 bps on Monday to close at -0.36%, a new all-time low. However, U.S. stocks recovered late and shorter Treasury yields ticked back up. The S&P ultimately gained 0.8% while the 2-year yield added 3.2 bps to 1.79%. The 10-year yield rose 1.9 bps to 2.02%.


Overnight – Trade Optimism Levels Off as Growth Worries Remain: Optimism around the weekend trade truce abated Tuesday following reminders of why a treaty between the U.S. and China is of utmost importance. Global stocks leveled off on Tuesday and Treasury yields moved back down a day after separate reports showed manufacturing activity slowed around the globe in June. Chinese stocks were mixed while Europe’s Stoxx 600 ticked higher by 0.2% just before 7 a.m. CT. Shifting central banks were a major theme for the markets in June (more below) as global growth worries tied to the trade tensions have led to expectations for easier monetary policy in the months ahead. Overnight, the Reserve Bank of Australia cut its target rate for a second time in a month to an all-time low of 1.00% in hopes of boosting economic activity down under. Yields in the U.K., however, were leading all declines among major global economies in response to the country’s construction PMI sinking to its weakest level in more than a decade under the weight of incessant Brexit uncertainty. The U.K.’s 10-year yield dropped 5.3 bps to 0.76%, a new low since 2016. German yields briefly spiked on a headline the ECB was in no rush to cut rates in July and could opt instead for changes to the statement’s language to point to a possible adjustment in September. U.S. equity futures fell just below breakeven while the 2- and 10-year Treasury yields dipped 1.8 bps and 2.2 bps, respectively.


ISM Manufacturing PMI Beat Expectations in June at 33-Month Low:
The ISM’s manufacturing PMI fell less than expected in June, but still registered its weakest reading since the 2016 presidential election. The headline index dropped from 52.1 to 51.7 last month, holding above the 51.0 level economists expected. The details were a mixed bag but the broader takeaway is that sentiment has been buffeted by the ongoing tensions. While production and employment firmed up in the face of uncertainty, new orders slowed to the weakest level since 2015, inventories contracted for the first time since 2017, and there was the least pressure on supplier delivery times since late 2016. Although it didn’t impact the headline PMI, the prices paid index posted the biggest monthly change of all of the underlying indices. The 5.3-point drop was driven in part by 23.9% of respondents report lower raw materials costs, the largest share since February 2016.


Construction Spending Slipped in May: Construction spending fell 0.8% in May but was revised from unchanged to up 0.4% in April. The decline in May was driven by lower spending on residential and non-residential projects in both the private and public sectors. In the private sector, non-residential activity contracted 0.9% while weaker home improvement and single family activity led to the 0.6% drop in the residential category. Residential spending has contracted for five months in a row and has slowed on a year-over-year basis in 15 of the last 22 months. Total public construction dropped 0.9% in May on a 5.2% slump in federal spending and a 0.6% decline at the state and local level. Despite the monthly decline, public spending has been generally strengthening since early in 2017.


ICYMI – June 2019 Monthly Review: The S&P 500 snapped back sharply in June and Treasury yields fell to multi-year lows in response to the world’s major central banks pivoting to a more dovish posture amid increased uncertainty. After tumbling 6.6% in May, the S&P 500 rallied back 6.9% on hopes responsive monetary policy could be a salve for the trade-induced economic slowdown. The surge represented the strongest June gain since 1955 and, helped out by a disastrous December, capped the strongest first-half performance (+17.3%) for the index since 1997. With investors now expecting the Fed could lower rates by 0.75% before the end of 2019, the 2-year yield dropped as low as 1.69% intraday, its lowest mark since November 2017, while the 10-year yield fell as low as 1.97%, a new low since the 2016 presidential election. Click here to view the full June review.


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